Malaysia's 2010 Budget Cuts Income Tax And Deficit

by Mary Swire, Tax News.com, Hong Kong

28 October 2009

Malaysia’s 2010 budget, introduced by the Prime Minister, Najib Razak, has proposed tax measures and incentives to produce an expected net reduction in the government’s fiscal deficit to 5.6% of GDP in 2010, compared with 7.4% in 2009.

The government proposed a reduction of 11.2% in public expenditure, from more than MYR215bn (USD64bn) in the revised allocation for 2009, to just over MYR191bn for 2010. This fall in expenditure more than compensates for the expected reduction in government revenue in 2010 - by 8.4% to MYR148bn, compared with MYR162bn in 2009.

In the face of the overall expected reduction in revenue, the government has introduced a number of tax changes and incentives. For example, to ensure that individual income tax rates remain competitive internationally, the announced measures for 2010 include a decrease in the income tax rate charged on the highest individual incomes above MYR100,000 from 27% to 26%, together with an increase in personal allowances from MYR8,000 to MYR9,000. The income tax rate for non-resident individuals is also reduced by 1% to 26%.

To encourage employment in selected important industries for Malaysian economic development, it is proposed that foreign and Malaysian workers in those industries will be taxed at a flat rate of 15%. The industries are green technology, biotechnology, educational and healthcare services, financial advisory and consultancy, logistics and tourism.

To widen the tax base, there would be a capital gains tax on the disposal of real property at a fixed rate of 5%, with an exemption of MYR10,000 or 10% of the gains, whichever is the higher, given to individuals. The tax would be collected as a withholding of 2% on purchase values, but intra-family transfers and a once-in-a-lifetime disposal of residential property by a Malaysian citizen would be exempt from the tax.

In order to encourage prudent spending, the government is also introducing a service tax on credit cards – of MYR50 per year on the principal card, and MYR25 on any supplementary cards.

To encourage the use of broadband services, meanwhile, individual taxpayers will be given tax relief on broadband subscription fees up to MYR500 per year.

There would be further tax incentives for small and medium enterprises to register patents and trademarks. Expenditure incurred in their registration will now be allowed as a deduction for income tax purposes.

As a promotion of the use of green technology, it is proposed that the owners of buildings awarded a Green Building Certificate would be given a tax exemption equivalent to 100% of the additional capital expenditure incurred to obtain the certificate. Furthermore, buyers of such buildings will be eligible for an exemption from stamp duty on all transfer documents.

To standardise the tax system, and to ensure that the government’s cash flow reflects current economic performance, income assessment on upstream petroleum companies will be standardised with the remainder of the corporate sector, so that they will be assessed for tax on their current, rather than previous, year’s income.

Presently, approved instruments of Islamic financing are given additional stamp duty exemption of 20%. That exemption was to expire on December 31, 2009, but has been extended to December 31, 2015.

There is to be an extension and expansion of tax incentives for the issuance of Islamic securities. Expenses incurred in such issuance approved by the Securities Commission are currently allowed as a deduction for income tax purposes.

That incentive was granted in 2003 and was due to expire next year. It has now been extended to 2015, and has been expanded to include Islamic securities approved by the Labuan Offshore Financial Services Authority (LOFSA) from 2010.

To assist further in the development of Islamic finance, and in particular non-ringgit sukuk, the existing tax exemption, on profits derived from the issuance of sukuk approved by the Securities Commission, will also be extended to the issuance of sukuk approved by the LOFSA.

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